Gulf Intelligence presents Fujairah Special Report Series CONTENTS WHITE PAPER What is the Outlook for the Establishment of Middle East Oil Products Benchmarks? SPECIAL REPORT Fujairah Realizing Ambitions For a Global Energy Hub One Step at a Time SPECIAL REPORT Fujairah – an Emerging Hub on the South-South Energy Trading Corridor The Gulf Intelligence What is the Outlook for the Establishment of Middle East Oil Products Benchmarks? The Gulf Intelligence SEPTEMBER 2016 The Gulf Intelligence SEPTEMBER 2016 Whitepaper Whitepaper In 1973, oil consumption in Arabia was less than 1% of global demand. Forty years later, the Gulf States, with just 0.5% of the world’s population, consumed 5% of its oil. Contents 02 The Gulf’s Energy Trading Outlook: Soft Infrastructure Primary energy consumption Needs Rapid Upgrade to Catch up with Hard Infrastructure in the past decade has grown 06 Participants: Oil Market Workshop more than twice as fast as the 08 Stream 1 - What are the Next Steps required to establish world average of 2.5% per year. a liquid trading hub in the Gulf by 2020? 10 Overview: Top Three Recommendations The Gulf’s 2001 consumption 12 Stream 2 - What should be the Next Steps to support the of 220 million (m) tons of oil establishment of independent oil products benchmarks in the Gulf? equivalent nearly doubled by 14 Overview: Top Three Recommendations 2010 and is expected to nearly 16 Survey Results: Oil Markets Workshop double again by 2020. The Gulf Intelligence SEPTEMBER 2016 Whitepaper The Gulf’s Energy Trading Outlook: Saudi Arabia’s Significant influence Saudi Arabia is by far the largest of the Gulf states by population, economy and energy reserves, has shot up the ranks of global oil consumers. By 2009, the Kingdom had Soft Infrastructure Needs Rapid surpassed Brazil and Germany to become the world’s No. 6 oil consumer, despite its comparatively small population, economy and industrial base. By 2014, Saudi Arabia and Russia – another major oil producing and exporting country – were consuming oil in nearly Upgrade to Catch up with equal amounts: 3.185m barrels a day (b/d) in Saudi Arabia and 3.196m b/d in Russia. While Russia’s plentiful natural gas supply allows it to substitute for oil in the domestic economy, oil-based energy prices in Russia are also much higher. For example, a liter of gasoline sold Hard Infrastructure for 86 cents in Russia in 2014, but 12c in Saudi. In recent years, the Gulf has seen the growth of an array of key features of a world-class oil trading SAUDI OIL CONSUMPTION IN PERSPECTIVE hub. It has become a major logistics hub, with pipelines, vast storage and several deep-water ports. It is supported by growing financial centers and now the majority of banks, oil companies, multi- Country Oil consumed GDP Population Oil consumption nationals, national oil companies (NOCs) and trading houses are represented there. The region is 2014 (m bbl/d) 2014 2014 per capita (bbl/yr) also in the midst of a refining construction boom, with more than a million barrels a day of capacity Brazil 3.23 US$2,353bn 203 million 5.8 added in the last few years. There is plenty more to come. Germany 2.37 US$3,860bn 81 million 10.7 Yet, the physical spot markets are still somewhat old-fashioned. In essence, they revolve around Saudi Arabia 3.20 US$752bn 31 million 37.8 benchmarks based in other regions and are not supported by deep and localized derivative markets. Russia 1.50 US$1,857bn 144 million 8.1 Physical trades tend to be point-to-point, without chains of traders and position-taking – both key Source: IMF World Economic Outlook 2015, BP Statistical Review 2015 generators of liquidity. Plus, transparency around pricing and fundamentals data is sporadic. There is a growing desire to see the market develop, as the domestic downstream markets in the Power generation growth in the GCC countries has been nothing short of dramatic, given that region post some of the strongest growth figures of any in the world and the refining construction most of the region was un-electrified as recently as 1960. In Oman, large-scale electrification boom looks set to continue. The soaring regional demand for jet fuel, naphtha, diesel, gasoline and did not even unfold until well into the 1970s. Many residents can remember the difficult days fuel oil are propelling discussions on the need to establish independent oil products benchmarks in before refrigeration and air conditioning. Residents of the richer states of Kuwait, Qatar and the Gulf. the UAE now consume more electricity, on average, than residents in the US. The Gulf Intelligence Oil Markets Workshop held on April 27th, 2016 and supported by Fujairah The growth of power generation averaged 10% per year since 1973, slipping to 7% per year and S&P Global Platts was tasked with the challenge to identify and shortlist the most urgent between 2000 and 2010, which was slightly faster than the average GDP growth that decade ‘next step’ recommendations required to tackle two critical questions: of 6.5%. About 60% of power generated in the GCC countries flows from natural gas-fired plants, versus 40% for liquid fuels, such as crude oil, diesel and heavy fuel oil. Overall, about a 1. What are the barriers to establishing a global energy trading hub in the Gulf region? third of all natural gas produced in the Gulf states is consumed in regional power generation. Gas demand is exacerbated by its use in producing desalinated water, which is often in co- 2. What steps can be taken to support the establishment of independent oil products generation plants that use waste heat to produce electricity. benchmarks in the Gulf? In recent years, growth in electricity demand has outstripped domestic supply of natural gas The ultimate drivers of high rates of energy consumption in the Gulf are government policies. In the in five of the six GCC states. Only Qatar commands a sufficient supply for the foreseeable early days of oil, policy focused on national development. Energy resources were seen foremost as future. The shortage leaves Gulf states facing higher marginal costs for new power generation generators of export revenues, which were then invested to advance improvements in infrastructure and production of desalinated water. In the past, governments had to cope with the cost of and economies. building plants, while surplus feedstock was made available as a byproduct of oil production. In 1973, oil consumption in Arabia was less than 1% of global demand. Forty years later, the Gulf Now, policymakers must contend with market-priced imported fuels, the expensive States, with just 0.5% of the world’s population, consumed 5% of its oil. Primary energy consumption production of unconventional gas, or the opportunity cost of burning crude oil and other in the past decade has grown more than twice as fast as the world average of 2.5% per year. The costly liquid fuels. Oil demand has risen across the GCC by an average of 9% per year since Gulf’s 2001 consumption of 220 million (m) tons of oil equivalent nearly doubled by 2010 and is 1973, growing faster than GDP, on average. Aggregate oil consumption in the six GCC states expected to nearly double again by 2020. was less than 500,000 b/d in 1973 and more than 4m b/d in 2014. 2 3 The Gulf Intelligence SEPTEMBER 2016 Whitepaper Heavy Although power demand has been problematic in all GCC States outside Qatar, Saudi Arabia Intensifying domestic crude burning coupled with Fuel Oil 6% and Kuwait face the highest demand pressure because of their reliance on liquid fuels – crude a 1.4m b/d increase in crude shipments to Aramco oil, heavy fuel oil and diesel fuel – for most of their power generation feedstock. Hence, while refineries inside and outside the kingdom signal that oil consumption in the remaining GCC states is weighted more heavily toward the transport Saudi Arabia is moving beyond its long-held role as the Diesel sector – where oil is considered most valuable – burning of liquid fuels for power generation is world’s market-balancing supplier of crude oil. Recent 35% Natural still dominant in Saudi Arabia and Kuwait. (See charts) data show slipping Saudi crude exports, alongside Gas 39% flat or rising production. Assuming that Saudi crude production remains constant at around 10m b/d, the SAUDI POWER amount of crude available for export could fall below GENERATION BY OIL CONSUMED IN TRANSPORT SECTOR AS SHARE OF TOTAL DEMAND IN 2012 5m b/d by 2020. FUEL, 2013 100 Shifting Dynamics Across the Middle East 80 There have been several shifts in the global dynamics 60 that will impact the Middle East’s oil product Crude % Among GCC states, oil is market. Investments in downstream infrastructure Oil 35% 40 chiefly used as transport fuel in Qatar and UAE, as and subsequent oil product supply in the Middle Saudi power generation 20 is the case in most of the East, which sits in the heart of the New Silk Road, by feedstock, with shares developed world has become increasingly prominent – especially as given for liquid fuels, 2013 (Source: IEA 2015) 0 European suppliers shrink back after more than a (Source: MEES 2014) Kuwait Saudi Oman Bahrain Qatar UAE Iran USA Arabia century of dominance. Plus, the lifting of sanctions on Iran in January will likely have a significant impact on the Gulf’s oil product supply and access to Asian clients, especially in the fuel oil market. Iran’s fuel oil Saudi Arabia consumed more than a quarter of its overall production in 2013.